Commissioner of Income Tax vs D.C. Gandhi Associates

G.T. Nanavati, J.—Rule in Income Tax Applications Nos. 196 and 197 of 1993. Mr. J. P. Shah waives service of the rule.

These applications are filed by the Commissioner of Income Tax u/s 256(2) of the Income Tax Act, 1961, as the Tribunal refused to refer the

questions suggested by him to this court u/s 256(1) of the Act.

In all these applications, the assessees are a firm of advocates. The assessees follow the cash system of accounting. In these cases, the Income

Tax Officer found that the assessees were maintaining clients'' accounts and there were huge credits in those accounts. The assessees used to

receive in advance from the clients money towards expenses like stamp duty, registration fees, filing fees, etc., and the sums so received were

credited to the parties'' accounts. As and when expenses were incurred on behalf of each client, the sums so spent were debited to the client''s

account against the sums so received. After the case of the client is decided or the work of the client is over, the assessee prepares a bill and sends

it to the client. The fees account is credited only when final settlement of the bill is done, that is, only when the balance, if any, due from the client is

received by cash voucher. The Income Tax Officer finding that the bills were not prepared immediately on completion of the clients'' work, came

to the conclusion that the assessees were enjoying the moneys received from the clients without showing the same as their income and were paying

tax on it when it suited them. The Income Tax Officer was of the view that the gross professional fees had to be determined on the basis of actual

cash receipts in order to arrive at the real income from profession. As the assessees are adopting the cash system of accounting, the Income Tax

Officer thought it fit to treat the appreciation of outstanding receipts in the clients'' accounts as the income of the assessees and levied tax, interest

and penalty thereon.

The Commissioner of Income Tax (Appeals) in the case of D. C. Gandhi Associates - the assessee in Income Tax Application No. 161 of

1993 - held that the assessee had been following this method of accounting for the last twenty-one years and the same was accepted by the

Department after scrutiny. He was also of the view that disturbing that method in the case of the assessee would create innumerable difficulties

involving a series of adjustments for the past many years. He, therefore; held that the Income Tax Officer was not justified in making the addition

and, therefore, ordered the said addition to be deleted.

In the case of C. C. Gandhi and Co.; the assessee in Income Tax Applications Nos. 196 and 197 of 1993, the Commissioner of Income Tax

agreed with the view taken by the Income Tax Officer that the net accretion to the credit of the clients'' account at the end of the last year should

be considered as the income of the assessee. He, however, did not agree with the amount of net accretion and to that extent modified the order

passed by the Income Tax Officer.

The Tribunal in the case of D. C. Gandhi Associates held that no material was gathered by the Assessing Officer to show that the assessee was

not adjusting the amounts in respect of litigation which ended before the close of the previous year and as the burden is on the Revenue to show

that any receipt can be treated as income and as it has failed to discharge that burden, the view taken by the Commissioner of Income Tax was

quite wrong.

In the case of C. C. Gandhi and Co., the Tribunal, after considering the relationship between the advocate and his client and the nature of

clients'' money in the hands of the advocate"", held that the advocate was in the position of a trustee for his clients in respect of the said moneys.

After considering the facts of the case, the Tribunal held that the moneys received by the assessee from clients were in the nature of trust and were

to be expended towards expenses for and on behalf of the clients in connection with the work entrusted by the clients to the assessee, and the

system of accounting followed by the assessee for a number of years was in conformity with the rules framed by the Bar Council of India in that

behalf and consistent with the relationship between a client and an advocate. The Tribunal also held that there was no material brought on record

by the Assessing Officer to show that even though the fees were settled and received earlier, the same were not entered as income of the assessee

in the account books of the assessee. The Tribunal thus upheld the contention of the assessee that clients'' money in its hands was not its income

and, therefore, the authorities below were in error in making additions to its income by taking a different view.

The Revenue having lost in these cases, applied to the Tribunal to refer the following questions to this court :

Income Tax Application No. 161 of 1993 :

Whether the Appellate Tribunal is right in law and on facts in deleting the amount of Rs. 5,01,956 of the professional receipts which pertained to

the year under consideration?

income tax Application No. 196 of 1993 :

Whether the Appellate Tribunal is right in law and on facts in deleting the addition of Rs. 7,32,363 to the total income of the assessee being the

difference between the opening and closing balance of the clients'' account, i.e., the amount representing the fees not transferred to fees account ?

Whether the Appellate Tribunal is right in law and on facts in restricting the addition to Rs. 42,770 from Rs. 1,86,196 as sustained by the

Commissioner of Income Tax (Appeals) ?

income tax Application No. 197 of 1993 :

Whether the Appellate Tribunal is right in law and on facts in deleting the addition of Rs. 7,32,363 to the total income of the assessee being the

difference between the opening and the closing balance of the clients'' account, i.e., the amount representing the fees not transferred to fees account

?

Whether the Appellate Tribunal is right in law and on facts in restricting the addition to Rs. 43,770 from Rs. 1,86,169 as sustained by the

Commissioner of Income Tax (Appeals) ?

What is contended by learned counsel for the Revenue is that the assessees are adopting a device to reduce the income as there was no fixed

time-limit within which the work of the clients was to be treated as completed and thus the real income of the assessees was not reflected in the

statements filed on the basis of the accounts maintained by them. He also submitted that the method of accounting followed by the assessees was

not proper and consistent with the cash system of accounting and, therefore, the view taken by the Tribunal has to be regarded as erroneous. He

submitted that this being a question of law ought to have been referred to this court by the Tribunal. In this connection what is required to be borne

in mind is that the method of accounting followed by the assessees was accepted by the Income Tax authorities for a large number of years.

Learned counsel appearing for the Revenue was not able to point out how the method of accounting followed by the assessees was basically

wrong. On the contrary, we find that the Bombay High Court in Manilal Kher Ambalal and Co. Vs. A.G. Lulla, Seventh Income Tax Officer and

others, considering a similar method of accounting, though by a firm of solicitors, has approved the said method of accounting on the ground that it

is an accepted method of accounting so far as solicitors are concerned. In our opinion, the position of an advocate in this behalf is not very different

from that of a solicitor and, therefore, even in the case of advocates such a method of accounting can be regarded as accepted method of

accounting. As pointed out by the Commissioner of Income Tax and by the Tribunal in the other case, there is nothing to show that by following

this method of accounting the income of the assessees was reduced. We fully agree with the view taken by the Tribunal that the relationship of

lawyer and his client is a fiduciary one and that the moneys of the clients kept separately in the clients'' accounts are held by him like a trustee

unless a particular amount out of it was earmarked as his fees. Whether the accounting method was used by the assessees as a device for reducing

their income or not would be a question of fact in each case. In these cases it is found as a matter of fact that this particular method of accounting

adopted by the assessees was not with a view to reduce the income. There was nothing on record to show that the bills in respect of completed

matters were not prepared and sent for settlement during the relevant financial year or within a reasonable time and that too with a view to show

reduced income. We are, therefore, of the opinion that the Tribunal was right in not referring the questions proposed by the Revenue to this court

u/s 256(1) of the Act.

Rule in each of these applications is discharged. No order as to costs.